Sunday, February 14, 2016

Doing The Right Thing When It's Difficult


Last week, Justin Trudeau said that his government will not meet its promise to balance the books before the next election. The Conservatives will hammer him for breaking a key election promise. But, Tom Walkom writes, Trudeau is doing the right thing:

Not that there is anything wrong, in principle, with balancing budgets. Everything else being equal, budget balancing is a good idea. It forces government to exercise some discipline over spending. It signals to voters that if they want extra services they should be prepared to pay higher taxes.
these days, everything else is not equal. The world economy is weak. Japan is struggling, as are parts of Europe. The Chinese economy is slowing.

So-called miracle economies like that of Brazil are no longer quite so miraculous. Nor has the much anticipated U.S. recovery lived up to expectations.

The decision by central banks to slash interest rates to near (or in some cases below) zero boosted the stock market for a while. But it has not helped the real economy much. Companies are happy to use cheap money to buy one another. In a time of uncertainty, they are less keen on expanding job-creating productive capacity.
For countries such as Canada that rely on natural resources, falling commodity prices have added an extra burden.

The world has changed since Trudeau set his 2019 deadline. There are only three ways to balance the books: cut spending, raise taxes or sell crown assets. And, at this point, there is little left to sell.

Trudeau's plan to spend $60 billion on infrastructure will help. That number may have to be bigger. The Conservatives will howl and call Trudeau names. But they've done that for ten years.

Still, doing the right thing can be really difficult.


Lorne said...

An additional 'benefit' to this deficit-spending, Owen, it the state of apoplexy, both real and feigned, it will send the right-wing true believers into. I suspect Rona et alia will be spinning this into a mighty tale of umbrage when the budget is released. I wonder if they will notice few are paying attention to their outrage.

Anonymous said...

The Liberal plans to spend a lot of money on infrastructure will only work to stimulate the economy if that money is spent properly, on the right projects, in the right locations, with the right companies, with Canadian workers. Simply continuing the longstanding Liberal/Conservative tradition of spending our money on pork-barrel white-elephant projects with corrupt, sleazy companies will not do the trick. Details matter.

They also need to increase taxes on (and cut subsidies for) profitable corporations and crack down on the tax-evading rich. They also need to rip up the international trade deals that harm our economy. Otherwise, we will be back in the same crisis situation once the stimulus spending wears off.

Owen Gray said...

Rona may fulminate, Lorne. But I suspect that her constituents will eagerly accept the money.

Owen Gray said...

I agree wholeheartedy, Anon. Spending on infrastructure has to be done intelligently. And that means it may take more time to get it right than some people are willing accept.

Hugh said...

The govt wants to lower the debt to GDP ratio, this is why they are desperate to grow the GDP. They want to spur GDP growth by adding more debt. Addressing excessive debt by adding more debt is crazy.

Since 2008 there has been low interest rates and budget deficits every year. Debt has grown hugely, but GDP growth is slow.

Striving for endless GDP growth on a finite planet with increasing energy costs and resource limits is not a good plan, IMO.

The Mound of Sound said...

I don't see how we'll balance budgets in Canada until we come to grips with the inherent vulnerability of our petro-economy. How many times must we watch Alberta's fiscal roller coaster cycle through booms and busts before we realize that's endemic to governments depending on fossil royalties for general revenue? Peter Lougheed laid it all out while he was Alberta premier and his warnings have been proven true again and again and again. At this point it isn't clear how we can get out of this dysfunctional rut even if the will to reform could be mustered. Oil seems to be the crystal meth of politics.

We also need to bear in mind the fragility of the global economy and the warnings that abound of another looming recession perhaps as great as that of 2008. How do we prepare ourselves for something that potentially seismic? We had better come up with some policies to brace ourselves as well as possible.

Owen Gray said...

I agree that resources are finite. That's why it's so important that investments be made wisely, Hugh. Investments need to be made in sectors which are sustainable, not in one off opportunities.

Owen Gray said...

Lougheed really tried to create a diversified, sustainable economy, Mound; and he knew a bad investment -- the tar sands -- when he saw it.

The last bust was in 1982, and Albertans responded to it by electing Ralph Klein. As a media personality, Klein was familiar to them. But he was anything but wise. We need a dose of Lougheed's wisdom.

The Mound of Sound said...

There have been others, Owen. 2008/2009 saw prices plummet to $33 per barrel, a drop of about a hundred dollars, which marked a period of intense pain for Alberta and its government with havoc in the real estate markets and cuts in government services, the usual.

Owen Gray said...

I'd forgotten, Mound. It's Innes' resource trap replaying itself over and over again.